Services
Tax Accounting Payroll Advisory             Our Offices
Become a Franchisee
Find an office
Skip to main content

Tag: tax planning

Tax Audits Demystified: How to Prepare and Respond as a Small Business

Posted on August 16, 2023 - 7:17 pm by

As a small business owner, the term “tax audit” might strike fear into your heart, conjuring images of auditors poring over your financial records with a fine-tooth comb. While tax audits can be intimidating, understanding the process, being proactive in your tax compliance, and knowing how to respond can help ease the stress. In this article, we’ll demystify tax audits, provide tips to reduce audit risk, and guide you through steps to take if your small business is audited.

What is a Tax Audit?

A tax audit is an examination of your financial records and tax returns by the Internal Revenue Service (IRS) or state tax authorities to ensure the accuracy of your reported income, deductions, and credits. Per the IRS, audits can be conducted randomly, but more often they are triggered by certain red flags, discrepancies, or patterns that catch the attention of tax authorities. 

Reducing Audit Risk

While audits can happen to anyone, there are steps you can take to minimize your audit risk: 

  1. Accurate Recordkeeping: Maintain thorough and organized records of your financial transactions, including receipts, invoices, bank statements, and expense reports. This transparency can provide a clear trail of your business activities. 
  2. Consistency: Ensure consistency in your reported income and deductions from year to year. Drastic changes can raise eyebrows and trigger audits. 
  3. Classify Expenses Correctly: Properly categorize your business expenses. Misclassifying personal expenses as business expenses can lead to an audit.
  4. Reasonable Deductions: Claim only legitimate business deductions. Exaggerated or questionable deductions can invite scrutiny. 
  5. Hire a Professional Accountant: A certified tax professional can help ensure accurate tax filing and adherence to tax laws, reducing the chances of errors that might trigger an audit. 
  6. Report All Income: Ensure you report all income, including cash payments. Omissions can lead to serious consequences if discovered. 

Steps to Take If Audited

Even with precautions, audits can still occur. If your small business receives an audit notice, follow these steps: 

  1. Stay Calm: Don’t panic. An audit notice doesn’t necessarily mean you’ve done something wrong. It’s a routine procedure to verify your records. 
  2. Read the Notice Carefully: The notice will outline the scope of the audit, the years under review, and the specific documents requested. Understanding the requirements is crucial. 
  3. Gather Documentation: Collect all requested records, including financial statements, receipts, invoices, and relevant tax returns. Having organized records will make the process much smoother. 
  4. Consult a Professional: If you don’t already have a tax professional, hire one now. They can guide you through the process, help you understand your rights, and represent you before the tax authorities. 
  5. Cooperate and Respond Promptly: Respond to the audit notice within the specified timeframe. Cooperation with the auditor is key. Provide only the requested information but be thorough and honest. 
  6. Be Prepared to Explain: Be ready to explain any discrepancies or unusual entries in your records. A logical and honest explanation can go a long way in resolving issues. 
  7. Understand Your Rights: Familiarize yourself with your rights as a taxpayer during an audit. These rights include the right to representation, the right to appeal decisions, and protection against unfair treatment. 
  8. Appeal if Necessary: If you disagree with the audit findings, you have the right to appeal within the IRS or through the courts if necessary. Your tax professional can guide you through this process.

How Padgett Can Help

While tax audits may seem daunting, they are a part of maintaining a fair and accurate tax system. At Padgett, we can help you maintain accurate records and prepare you for the process, enabling you to navigate audits with confidence. Contact us today to find your local Padgett advisor.

Read More

What is an IRS audit, really?

Posted on May 10, 2023 - 9:28 pm by

Especially since the passing of the Inflation Reduction Act that provided $80 billion in funding to the IRS, many small business owners have been concerned about the possibility of having their finances audited. While most of the funds are dedicated to improving taxpayer services, it is true that some of the funding will be used for enforcement and audits.  

So, what does that mean for your business, and how can you avoid being audited in the future? 

What is an IRS audit? 

An IRS audit is an examination of your tax returns, financial records, and other documents to ensure that you have reported your income and deductions accurately and in compliance with the tax laws. Receiving an IRS notice doesn’t mean you’re being audited, and an IRS audit is not the same as other types of business reviews. An IRS audit is conducted by the government, and it can result in penalties, interest and even criminal charges if it uncovers fraud or other serious issues. 

But don’t panic—audits are not a common occurrence. Last year, only 0.38% of returns were audited by the IRS, according to USA Today. It’s also unlikely that taxpayers making less than $400,000 in annual income will be targeted for audits. 

What are the different types of audits? 

While the prospect of an IRS audit may seem daunting, it’s important to remember that not all audits are created equal. There are several types of IRS audits that you may encounter as a small business owner. Here are the most common ones: 

  1. Correspondence Audit: This is the most common type of audit, and it can be conducted entirely by mail. The IRS will request specific documents or information from you, and you will have a deadline to provide the requested materials. This type of audit is usually focused on a single issue, such as a missing tax form or a discrepancy in reported income, and most commonly occurs with charities and nonprofit organizations. 
  2. Office Audit: An office audit is conducted in person at an IRS office. During an office audit, an IRS agent will review your financial records and ask you questions about your tax returns. This type of audit is typically focused on one or two specific issues, such as a deduction that the IRS believes may not be valid. 
  3. Field Audit: A field audit is the most comprehensive type of audit, and it involves an in-person visit from an IRS agent to your place of business. During a field audit, the agent will review all of your financial records and ask you questions about your business operations. This type of audit is usually reserved for larger businesses or more complex tax issues. 
  4. Taxpayer Compliance Measurement Program (TCMP) Audit: This type of audit is relatively rare, and it is typically used to measure compliance rates across a larger population of taxpayers. The IRS will select a random sample of your returns and conduct a comprehensive audit of those returns to measure your compliance with the tax laws. 
  5. Specialized Audit: A specialized audit is conducted by an IRS agent with expertise in a particular area, such as international tax issues or employee benefit plans. These audits are typically reserved for businesses with complex tax issues that require specialized knowledge. 

Note: Beware of scam calls impersonating the IRS! If you are selected for an audit, the IRS will only notify you by mail, not by telephone.  

What should you do if you’re audited? 

No matter the type of audit, you have the right to be represented by a tax professional, so make sure you choose one who is qualified to represent you. If you are notified of an IRS audit, it’s important to respond promptly and professionally. Ignoring or delaying an audit can only make the situation worse. Instead, gather the requested documents and information and work with your tax professional to respond to the IRS’s requests. 

It’s also important to remember that an audit does not necessarily mean that you have done something wrong. The IRS uses algorithms to screen returns for potential red flags and sometimes selects random returns for closer review. However, the IRS has stated it will be auditing more employment tax returns in the future because of the possibility of false or incorrect Employee Retention Credit (ERC) claims. If your business has received this credit, make sure to have all the necessary documentation, like employee, wage, and eligibility information, to support the claim under audit.  

If you have been selected for an audit, it’s not necessarily a reflection of you or your business. That being said, there are steps you can take to reduce your chances of being audited. First and foremost, make sure that you are reporting your income and deductions accurately and in compliance with the tax laws. By maintaining accurate records, reporting your income and deductions correctly, and working with a tax professional throughout the year, you can reduce your chances of being audited in the future. 

If you need a tax professional, Padgett can help! Contact your local office today.

Read More

Understanding IRAs: your retirement savings guide

Posted on April 6, 2023 - 9:05 pm by

With the recent passing of the SECURE 2.0 Act of 2022, you may have questions about the different types of Individual Retirement Accounts (IRAs) available. How do you choose what retirement plan is right for you? 

IRAs are a powerful tool for retirement savings. They are savings plans that come with tax advantages to help taxpayers build a retirement fund. Each type of IRA has its own set of regulations and deadlines. Here’s a quick overview of the most common kinds: 

Traditional IRA:

Contributions to a traditional IRA may be tax deductible and earnings grow tax-deferred until distribution, which means you won’t pay taxes on your traditional IRA funds until you make a withdrawal. The contribution limit for 2022 is $6,000, or $7,000 for those aged 50 and over ($6,500 and $7,500 for 2023). You have until April 15 or the tax filing deadline of the following year to make contributions for the previous tax year. Since the deadline is April 18 this year, you have a few extra days to make contributions for 2022. 

Roth IRA:

Unlike a traditional IRA, contributions to a Roth IRA are made after tax, so qualified withdrawals are tax-free. The contribution limit for 2022 is also $6,000, or $7,000 for those aged 50 and over ($6,500 and $7,500 for 2023). Roth IRAs have the same deadline as traditional IRAs, so you can contribute up until April 18 this year. 

SEP IRA:

A Simplified Employee Pension (SEP) IRA is a retirement plan for business owners and their employees. Employers can make tax-deductible contributions on behalf of eligible employees to their SEP IRAs. To be eligible, the employee must be 21, worked in the business at least 3 of the last 5 years and made at least $650 in 2022 ($750 in 2023). Like traditional IRAs, the earnings grow tax-deferred until the money is withdrawn. In 2022, employers can contribute up to 25% of compensation or $61,000 (whichever is less) to an employee’s plan ($66,000 in 2023). The same contribution limits apply if you are self-employed. Contributions must be made by your business’s tax-filing deadline, including extensions. 

SIMPLE IRA:

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a retirement plan for businesses with 100 or fewer employees that do not have any other retirement savings plan, including self-employed individuals. Because SIMPLE IRAs have lower start-up and operating costs, they are ideal for small employers. Employers must contribute a matching contribution for each eligible employee of either 3% of an employee’s compensation, or a nonelective contribution of 2% of the employee’s compensation, up to $305,000 for 2022 ($330,000 for 2023). Eligible employees include all employees who received at least $5,000 in compensation during any two preceding calendar years and in the current calendar year. An employee can contribute up to $14,000 from their salary in 2022 ($15,500 in 2023), and up to $17,000 for those 50 and over ($19,000 for 2023). Contributions must be made by the tax-filing deadline, including extensions. 

The rules and regulations surrounding IRAs can be complex and can change, so it’s always good to consult with a financial advisor and tax professional to ensure that you’re maximizing your retirement savings while complying with the plan rules.  

Whether you’re an individual looking to build your retirement fund or a small business wanting to offer a retirement plan to your employees, Padgett can help! Our nationwide network of EAs, CPAs and small business advisors are ready to work with you to prepare for the future. Find a location near you today! 

Read More

What should you do if you can’t pay your taxes?

Posted on March 17, 2023 - 9:27 pm by

While many of us are hoping to have a payday when our tax refunds arrive, if you owe taxes, you may find that April 15th is the wrong kind of “pay day.” If you’re struggling to pay your taxes this year, here’s what you need to know.  

1. File your return or extension by the due date.

To avoid any penalties for late filing, the first thing you should do is file your personal return by April 15th or request an extension of time to file. Since April 15th falls on a weekend this year and April 17th is a national holiday, April 18th is the filing deadline for 2022 individual returns. Note that an extension only extends your time to file, not to pay your balance due. Talk to your tax advisor to get your return or extension filed on time.  

2. Pay what you can.  

Even if you can’t pay the full amount at once, go ahead and pay what you can to reduce your overall balance. A lower balance may mean you owe less in interest late payment penalties later.   

3. Determine if you qualify for an installment payment plan.  

Talk to your tax preparer about applying for a payment plan. To manage your payment plan online, you’ll need to set up an account on the IRS website—you can follow our guide to get started. There are various kinds of payment plans, including short-term (120-days or less) and long-term, and they each have different fees and interest. Talk with your financial advisor about which option will be best for you.   

4. As a last resort, talk to your tax advisor about an offer-in-compromise.  

If you find that you aren’t able to pay your taxes, even with an installment plan, you may be eligible for an “offer in compromise,” which allows you to settle your debt for less than what you owe. The IRS considers factors that affect your ability to pay, like your income, expenses, and asset equity to determine eligibility. This program is not for everyone, so be sure to talk to a qualified tax professional about your options.  

We understand that owing the IRS money can be stressful, but don’t panic! A qualified tax professional can assist you in finding the best ways to manage your debt. Padgett has a nationwide network of CPAs and EAs who are ready to help, so you don’t have to worry. Find an office near you today!  

Read More

MFJ vs MFS: filing options for married taxpayers

Posted on February 16, 2023 - 7:07 pm by

If you’re married, you may not be aware of your tax filing options and assume that filing a return jointly with your spouse is the only choice available to you. In fact, married taxpayers can file separate returns. It’s tricky, though. There are specific situations where filing separately makes sense, and other times where it doesn’t. It’s important to choose the right method, because once you file jointly, you can’t amend your return to filing separately.    

There are no rules of thumb on when it makes sense for married taxpayers to file separately. Although in most cases, filing jointly will produce the most beneficial results, tax law has grown so complex that a great number of factors need to be considered. So what’s the real difference between the two options?   

Married Filing Jointly (MFJ)

Married filing jointly means that you and your spouse will file just one tax return, with income and deductions for both of you. The IRS usually encourages couples to file jointly. You’ll usually get a lower tax rate this way, and the IRS offers some tax breaks for joint returns. Some common benefits available to joint filers include:  

  • Earned Income Credit (EIC)
  • Dependent care credit 
  • Tuition credits
  • Child-care credits (unless you lived apart from July to December)
  • American Opportunity Credit
  • Lifetime Learning Credit for education expenses
  • Student interest loan deductions
  • More limited IRS contribution deduction
  • Lower limit on capital losses  

If you live in a community property state, such as Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin, a joint return is also much more convenient, as it avoids some tricky tax rules on separate returns.   

Married Filing Separately (MFS)  

There are some cases where filing separately may be a better choice for married taxpayers. Filing separately means that you will each file your own tax return and keep your income and deductions separate from your spouse’s.    

You may want to file separate returns if it means some deductions become available. For example, the spouse with the lower income may be eligible for a medical expense deduction if their income is kept separate, but not if it’s combined. Keep in mind, your filing status selection on your federal return could impact your state income tax return. Before finalizing your decision, be sure to consider the impact to both your federal and state returns.  

There are a few reasons to file separately even if doing so means you collectively pay more tax or get less of a refund. One is when you and your spouse keep separate finances as a rule. Another is to avoid being liable for each other’s amounts due. When filing jointly, the IRS can come after either of you to collect the full amount. And remember, if you’re filing separately and need to extend, you’ll need to each file your own extension as well.

How to choose?

The best way for married taxpayers to know for sure which method of filing is the best fit is to prepare the return both ways and compare the results. This means you’d have to prepare three returns—the joint return, and two separate returns. But who has time for that?  

Happily, most tax professionals can use their software, along with their knowledge of tax law and how it applies to unique separate filing situations, to determine whether it’s likely that filing separately would be better from a tax due or refund perspective. If your preparer isn’t offering this service, you might be missing out!     

If you want to be sure you’re not leaving tax money on the table, turn to a tax professional to help you file. Padgett’s network of CPAs and EAs can help you determine which method of filing is the best fit so you don’t have to worry. Find a location near you today!  

Read More

8 tips to manage stress during tax time

Posted on February 8, 2023 - 10:44 pm by

When filing mistakes can be costly, it’s understandable that tax time can be stressful if trying to handle your finances on your own. This time of year can be especially difficult if you’re dealing with issues like Seasonal Affective Disorder, as wintry weather can add extra stress. So, how do you manage stress to stay in control now and during other stressful times?

Avoid financial surprises.

Last year, Capital One found that 73% of Americans say their finances are a major cause of anxiety. But money doesn’t have to be so stressful! While you can’t always predict a costly emergency, working with an accountant throughout the year can help you avoid many other unexpected costs, like a surprise tax bill. With a good accountant by your side, finances can be one less worry on your plate, allowing you to feel more in control of your situation.

Keep your desk or work area clean.

If you’re feeling overwhelmed, try tidying your workspace. You may find that a clean desk can be a huge boost to your productivity—up to 84%! Regularly cleaning and disinfecting commonly touched surfaces can also help you avoid getting sick.

Open and sort any physical mail.

When you get mail, open it, and consider what kind of mail it is. Is it something to do, something to delegate, something to file, or something to toss? Sort your mail accordingly. Make sure you’re holding onto any financial statements or tax documents for your accountant. Don’t forget to actually do the task or toss the junk! Even neat piles become a mess tomorrow.

Organize your email inbox.

Read your incoming emails and sort them the same way as your physical mail. If you find email notifications distracting, you can try a strategy called email batching. Instead of checking and responding to emails constantly, set aside time to respond to them in “batches.” Checking your email only a few times a day can help you manage stress and may give you more time to focus on other tasks.

Set realistic priorities.

Don’t overload yourself or commit to doing more than you’re able. Consider what you can realistically get done in your time frame. If you’ve already overcommitted, prioritize your tasks. Do what you can, and for what you can’t…

Communicate honestly and promptly.

When problems arise, let people know as early as you can if a commitment you made can’t be met. If possible, reschedule for when you will be able to meet their needs. Keeping communication open—with both your clients or customers, your staff, and your coworkers—can help avoid a lot of stress. And when you’re short on time, don’t be afraid to skip the small talk and focus on business.

Establish checklists and set procedures.

If you have standard ways of doing tasks, you may find yourself feeling less worried about things getting done correctly. Research has shown that having a routine can make it easier to manage stress. Whether it’s getting your financial system organized with an accountant, setting procedures for handling incoming tasks, or just developing daily habits for yourself, maintaining structure during stressful times can help you feel like you’re in control of your surroundings.

Don’t do it alone.   

Mental health is as nuanced and individualized as physical health, so no solution is one-size-fits-all. As with taxes, mental health is something you shouldn’t hesitate to discuss with a professional, especially if you are struggling with serious negative thoughts or intense anxiety.

If you’re feeling overworked, don’t be afraid to delegate tasks to others. That’s where Padgett can help. Finding a full-time tax and accounting partner can help take some time-consuming tasks off your plate so you can spend more time and energy on the things that matter most. Reach out to a Padgett tax professional near you today to find out how we can help get your life back in balance.

Read More

6 tax deductions self-employed workers should know

Posted on February 1, 2023 - 10:13 pm by

There are a host of tax deductions available to self-employed individuals that can generate real savings when filing your tax return. As you prepare to file your 2022 taxes, here are a few deductions you should be mindful of:    

  1. Home office expenses: If you’re using an area of your home regularly and solely for business, you may be able to deduct expenses for a home office from your taxable business income.     

  2. Office supplies: Hang on to those receipts for pens, paper and printer ink as you may be eligible to deduct the total cost of your office supplies.   

  3. Social Security: Remember that if you’re self-employed, you’ll be paying more Social Security taxes than if you were on the payroll of a company. However, you can deduct half of these taxes on your return.  

  4. Vehicle expenses: If you use your vehicle for business, you can deduct either the actual expenses or the standard mileage rate, based on the business use of the vehicle. For the first half of 2022, the standard mileage rate is 58.5 cents per mile, and it increased to 62.5 cents per mile for the second half of the year.

  5. Section 179: This part of the tax code allows profitable business owners the opportunity to deduct up to the full cost of qualifying capital assets — like furniture, equipment and technology — immediately rather than depreciating them throughout their use. Any unused deductions can be carried forward and put toward next year’s tax return.  

  6. Food and beverages: The stimulus bill passed in December 2020 changed the deduction for meals, allowing businesses to deduct 100 percent of their qualifying food and beverage expenses if purchased from a restaurant in 2022.    

Curious about what deductions you might be eligible for on your 2022 tax return? Padgett’s talented network of CPAs, EAs and tax professionals near you can help navigate the confusing world of tax planning and filing. Find an office near you today! 

Read More

5 Tax tips for newly married people

Posted on July 19, 2022 - 1:39 pm by

With wedding season peaking between May and October, many newlyweds will soon be settling into their lives together. No matter when you choose to say “I do” if you get married anytime on or before the last day of the year, you’re considered married for the entire year in the eyes of the IRS. So, if you’re tying the knot anytime this year, here are 5 key tax tips you need to know.

1. Discuss filing status.

Once you are married you have two options when filing your tax return: married filing jointly or married filing separately. This is an important decision to make since you can’t amend to change your filing status once you file jointly. Most people choose to file jointly, but for some couples, filing separately can result in a bigger tax savings.

Because there are many factors to consider, it’s best to speak to a tax professional before deciding. They can often prepare sample returns and use their knowledge of tax law to help you determine which option will allow you to save the most on your taxes.

2. Update any name or address changes.

If you change your name after getting married, it’s important to make sure you update your information with the Social Security Administration (SSA). When you file a tax return, the name on your return must agree with the name the SSA has for your Social Security number or processing could be delayed or prevented. You can file Form SS-5 to apply for a new Social Security Card to reflect the change.

Did you move in with your partner or find a new home together since filing your last tax return? If so, make sure you update your address with the IRS to ensure you’re receiving refunds, notices, and any other important mail to your new residence. Accurate information can also help avoid processing issues with your return. You can update your address using Form 8822.

3. Check your withholding.

Combining income with your partner’s may move you into a new tax bracket. Consider changing your withholding and file a new Form W-4 with your employer. You can use the IRS’s Tax Withholding Estimator or work with a professional to help you determine the correct amount of withholding.

4. Update your bank account information.

If you change your name and choose to have your tax refund directed deposited into your bank account, it’s crucial to update the name on that account as well. If you file your return under your new name but don’t update your bank account, you will be unable to use that account to receive your refund. Make sure your bank account, SSN and tax return all have the same identifying information to avoid issues.

5. Consult a tax professional.

With so many new changes in your life, you don’t need to spend time worrying—or worse, arguing with your spouse—about your taxes. Working with a professional can help you make informed decisions and reduce financial stress.

Padgett’s nationwide network of CPAs and EAs are here to help! Find an office near you today to get started with tax planning for your married life.

Read More

We encourage you to contact us with any questions.

This field is for validation purposes and should be left unchanged.